Education: The Betting Continues

By Bryan Caplan

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Samuel Knoche, a student at Fordham University, has taken me up on an old bet:

I bet at even odds that 10 years from now, the fraction of American 18-24 year-olds enrolled in traditional four-year colleges will be no more than 10% (not 10 percentage-points!) lower than it is
today.

However, we’ve slightly modified the earlier terms.

First, the time window has shifted. Since the most recent data is for 2015, we are betting that when the 2025 data comes out, Samuel wins if the fraction of 18-to-24-years-olds enrolled in four-year colleges has fallen more than 10%. I win if it’s fallen less. Since the current rate is 29.9%, he wins if the rate is 26.6% or less. If the data series is discontinued, we call off the bet and I refund his money with 3% annual interest.

Second, Samuel has bet – and prepaid – $500. I’ve agreed to pay him 3% annual interest on his payment whether he wins or loses. That would imply that if he loses, I pay him $171.96, and if he wins, I pay him $1,171.96 – his original $500, plus my $500, plus interest. However, we also agreed that if I die, my heirs will keep the money. To compensate him, our final terms specify that if he loses, I pay him $200, and if he wins, I pay him $1200.

By the way, I’m now doing very well on my earlier education bets. When the first bets were made using 2009 data, the fraction of American 18-24 year-olds in traditional four year colleges was 29.6%. The latest figures put the rate even higher, at 29.9%.

READER COMMENTS

Peter Hurley

Sep 12 2018 at 2:10pm

For those who might say the 3% is too high, keep in mind that Bryan gets to risk $500 ten years from now in exchange for $500 today. If the money was escrowed from both of them today, it would only take an interest rate of 1.6% to pay the winner $1171.96.

1.6% is available risk free as bank interest today.

Heck, for a 5 year lock-in, you can get 3% APY as bank interest today on a CD.

Sep 12 2018 at 6:58pm

I’ve agreed to pay him 3% annual interest on his payment whether he wins or loses. That would imply that if he loses, I pay him $171.96, and if he wins, I pay him $1,171.96 – his original $500, plus my $500, plus interest.

Bryan, I’m guessing you’ll pay him the interest regardless of outcome so the bet resembles him putting his $500 in a 3% savings account for 10 years and then wagering only $500 on an instantly resolvable bet. Why did you choose the $171.96/$1171.96 payout structure instead of a $0/$1343.92 payout structure (where he hypothetically wagers $671.96 in the future instead of only $500)?

Owen Long

Sep 12 2018 at 8:11pm

How do I get in on this education betting?

Fred in PA

Sep 13 2018 at 11:36pm

Somehow, this comment seems misplaced. But I see no other opportunity to make it, so …

I’ll postulate that one’s earned income comes from only two sources; (1) payments for one’s labor and (2) payments for (the use of) one’s capital. (Sweat & Equity, if you’ll allow.) I’m counting knowledge and skills as capital / human capital; tools acquired through an investment in training & practice.

It seems obvious that raw labor (sweat) is plentifully available across the globe, and hence commands little recompense (starvation wages?). Hence one’s only hope of a decent lifestyle must come from the acquisition and deployment of capital / human capital. Our society doesn’t much reward saving, but there is a lot of encouragement for one to get an education — to acquire human capital (assuming one pursues education as an “industrial”, and not as a “consumer”, good).

I expect young people to still be driven to college as the most obvious avenue of acquiring such capital.

Caveats include; (1) Many (most?) young people might more appropriately seek to build their capital in a vocational school, rather than a college. (But will they? Will society — and especially their friends & family — ever endorse this wiser, but lower status, option?) (2) If enough people acquire a skill (let’s say, accounting) its price in the market will fall. If this should become obvious to all, the pressure to enroll will abate. (I believe such a thing has already happened in the field of law.) Indeed, if the compensation for having such a skill falls below the cost of acquiring it, the student pool will likely be limited just to those who love it. (3) It’s those people who study something because they love it — let’s say, Medieval French Literature — who create the (false?) image that college isn’t a paying proposition. And, yes, if too many students are merely indulging themselves, then college educations will continue to fall out of favor as an economic proposition. Such students purchased a college education as a “consumer” good — for their own personal pleasure. And no one has to pay you to enjoy yourself; you’ll do that without their remunerative encouragement. There are a (lucky) few students who just love cost accounting or dentistry or welding or …. (Key test; if no one will pay them to do it, will they still do it anyway as volunteer activity or a pleasurable hobby?) But most students in such fields are — I suspect — there because they think their acquired skills can be resold at a nice profit to willing buyers. That is, they’re purchasing a college education as an “industrial” good; not for one’s own pleasure, but for resale. This caveat, then, hangs on the likely ratio of students who approach college as self-indulgence to students who are pursuing it as self-development.

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